The coronavirus has millions of Americans working from home who never did before. If you're one of them, you may be anticipating you're entitled to some new tax breaks due to your new work location.
Unfortunately, the IRS has issued a recent reminder about an important rule that could affect your eligibility for one key deduction that new work-from-home employees may have been thinking about claiming.
Don't count on this tax savings
For those who have suddenly found themselves doing work out of their home, the home office deduction may seem like a natural new tax break to claim. There's just one big problem with that. As the IRS recently reminded taxpayers, the home office deduction is only available to:
- Self-employed taxpayers.
- Independent contractors.
- Individuals who are working in the gig economy.
Because of the Tax Cuts and Jobs Act, the deduction is not available to anyone who is classified as an employee.
The deduction has been suspended for the 2018 to 2025 tax years for traditional employees, so any workers who get a paycheck or a W-2 solely from an employer are not permitted to claim the deduction even if they've been working from home for months due to the coronavirus.
Of course, even self-employed and gig workers may not be entitled to the deduction, as there are strict rules. If you want to claim it, you must use a part of your home "exclusively and regularly" in connection with your business, or you must use part of your home as a daycare facility, on a regular basis for storage connected to your business, or for rental use.
That means if you meet with clients at your dining table or shut yourself up in your bedroom to run your business, you will not be eligible for the deduction. But if you have a dedicated office where you only do your paying work, then you can claim it.
If you are eligible, deductible expenses when using your home for business purposes can include a portion of your real estate taxes, rent or mortgage interest, utilities, maintenance, repairs, and depreciation based on the portion of the home used for business. However, you still can't claim a deduction for any other home-related expenses in other parts of your house that aren't used for your company. You can't, for example, deduct a part of your lawn mowing expenses for your home even if you have a home office eligible for the deduction.
Taxpayers need to be aware of these rules, as well as other tax changes that could come from working from home. While you still have plenty of time before you have to worry about filing your tax return for 2020, you don't want to be surprised by a bill that's bigger than anticipated if you incorrectly plan to claim deductions you won't end up qualifying for, didn't realize your unemployment benefits were subject to tax, or weren't aware you could owe more state taxes due to your remote work.